During the last two weeks we have seen the local stock market move up by more than 10 per cent. With such a significant movement one may wonder whether this is sustainable or not. Despite the difficult economic conditions there are still companies that will do well and have a bright future. In addition, there are many companies that are trading below value on the stock exchange. This is because the regime of high interest rates suppressed interest in the market. When the return on risk free investments is so high then there is no interest in the stock market because you can earn significant returns without the risk of losing your principal investment. High interest rates also tend to undermine the confidence that investors have in the ability of companies to compete globally.
The recent debt exchange programme has served to reduce interest rates but more importantly it has also boosted confidence in the economy. This has set a platform whereby the purchase of equities now appears to be a viable option. We have often seen this cycle in Jamaica, high interest rates suppress the market and then lower rates push the market up significantly. Unfortunately this is not the workings of a good market and results in unusually large swings in the market and unrealistic expectations. As a result, the market gets over excited, the prices go too high and the market collapse upon itself. The investors need to change their strategies and when a company is doing well then it should be bought. This would help to smooth out the uncertainties that exist in the market.
So , is it too late to buy? Not at all. There is still room for significant improvement in prices but one must choose their stocks carefully. Consult your stock brokers for suggestions on what to buy. For those of you who are risk averse, consider buying equity linked unit trusts as these will give you the benefit of the rise in the stock market with significantly lower risk.
I encourage you to remember the past, don’t get suckered into buying at the top of the market and sell your stocks once you have made a reasonable return. Don’t follow the crowd, follow the investing principles , don’t buy if the company is already fully valued and sell if the company is overvalued. Take your profits along the way and do not get greedy.